Sustainability as a decisive competitive factor

Never before in human history has society been changing as swiftly as today. Resources are becoming more scarce, geopolitical contexts more unstable, and public opinion is more critical and better informed. Human rights and ecology are increasingly finding their way onto companies’ strategic agendas. Companies are expected to assume responsibility along their entire value chains. Guido Palazzo, Professor of Business Ethics at the University of Lausanne and Visiting Fellow at the Universities of Nottingham and Oxford, gave Audi employees an insight into the present state of the debate on corporate responsibility. He indicated where a company’s responsibility starts, what the priority issues are and what standards and criteria should be observed.

Professor Palazzo, your special area is business ethics. Could you explain briefly what that term means?
Business ethics is concerned with the ethical dimension of economic activity. It extends from ethical questions at individual and team level (e.g. in what circumstances managers make ethical or unethical decisions), across questions at organisation level (e.g. what responsibility a company bears for social and ecological problems in its value chain), to institutional questions (e.g. how to promote sustainable consumption).

Do you think corporate responsibility is a decisive competitive factor today? And will its influence increase?
Responsibility is becoming the decisive competitive factor because companies are increasingly organised on a global scale, so the balance of power between companies and governments is tilted in favour of companies. Slavery today exists in the value chains of many industries (from cocoa to coltan) with no legal system in place to protect its victims. Governments are often neither willing nor able to prevent human rights violations. So since the late 1980s companies have been coming under pressure to step in and defend human rights themselves. Whoever fails to do so risks attacks from NGOs, is denounced in the media as a bad guy and may suffer significant damage to its reputation, which may ultimately cost a lot of money.

Where do you think a company’s responsibility starts and ends?
Potentially, companies today may come under attack for all social and ecological problems along their entire value chain. Apple, for instance, has problems with its direct supplier Foxcon in China, but also right at the start of the chain, with coltan mining in the Congo. The company has to work on all these fronts to neutralise human rights problems. The most important activity a company can perform today in the area of sustainability is to carefully analyse its value chain in order to identify its own potential social and environmental risks. In the worst case, the first you hear of such problems is in the main news bulletin on TV. In the best case, you first seek out partners to neutralise these risks.

Society is becoming more aware and more critical of how sustainable businesses and products are. What adjustments do companies need to make if they want to remain successful?
First, it is becoming increasingly easy for consumers, investors, politicians or activists to reveal problems in companies’ value chains. In China, for example, you often don’t even need to rely on NGOs, just a worker who takes a picture of the wretched factory working conditions on his smartphone. Companies can no longer deny or hide their problems. Transparency is increasingly forced upon them. We are currently seeing a big trend towards websites and apps for reviewing and ranking companies. In the not too distant future you will be able to scan a barcode with your phone to find out immediately whether a product was made in dignified conditions or not.

In 2008 you were awarded the “Max Weber Award for Business Ethics” for your pioneering suggestions on the social commitment of companies. Do you have any suggestions for Audi in that regard?
Most companies in most sectors make the mistake of treating responsibility reactively. They wait until a problem is dropped on their toes and elicits a painful reaction. That’s strategically unwise, costly and undermines the credibility of their entire sustainability efforts. I would urge Audi to address issues proactively and innovatively, before the NGOs activists start displaying their protest signs on Ingolstadt’s smokestacks.